Real Rigidities and Optimal Stabilization at the Zero Lower Bound in New Keynesian Economies

TY - JOUR

T1 - Real Rigidities and Optimal Stabilization at the Zero Lower Bound in New Keynesian Economies

AU - Horvath, Michal

AU - Belgibayeva, Adiya

PY - 2019/6

Y1 - 2019/6

N2 - The paper revisits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labor market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

AB - The paper revisits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labor market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

KW - Government Spending

KW - Income Tax

KW - Inflation

KW - Labor Market

KW - Strategic Complementarity

KW - Zero Lower Bound

UR - http://www.scopus.com/inward/record.url?scp=85021175735&partnerID=8YFLogxK

U2 - 10.1017/S1365100517000268

DO - 10.1017/S1365100517000268

M3 - Article

SN - 1365-1005

VL - 23

SP - 1371

EP - 1400

JO - Macroeconomic Dynamics

JF - Macroeconomic Dynamics

IS - 4

ER -